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Are you aware of your business risks?
Family Farm Success: It pays off to strategically examine risk management across your farm.
3 Min Read
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When we hear “risk management,” we think of the price of crops dropping or the price of fertilizer skyrocketing, and maybe of related hedging activities. While those are certainly important factors in farming, I encourage you to use a broader definition of risk management.
But first, what does risk management mean? According to Google’s AI summary: “Risk management is the process of identifying, assessing and controlling threats to an organization's assets and operations. The goal of risk management is to reduce risk to an acceptable level, while considering the costs and benefits of any actions taken.” Note that you cannot remove all the risk, but rather reduce it to an acceptable level, while considering the costs and benefits.
If you were CEO of a large company and had to tell your investors what risks the company faces, what would they be? The list might include the following:
Market risk. The one we know well: changes in prices of inputs and commodities.
Credit risk. How risky are your accounts receivable? And is the bank that finances your business stable and capable of handling your business needs as you grow?
Legal/compliance risk. Compliance with regulations, and the associated legal risk regarding labor laws, safety, environmental concerns, tax compliance, licensing, USDA/FSA participation, food safety, etc. This is a big one--and things we often overlook until there’s a problem, and we’re in trouble.
Fraud risk. Internal financial controls that prevent intentional fraud or unintentional financial mistakes.
Human capital risk. Actions by employees that could impact business reputation or operations, including safety risks. This also relates to the risk of workforce disruptions (due to turnover, skills shortages, or lack of succession plans) preventing you from completing your crop. Side note specific for farm families: succession plans to transition decision making often are overlooked…that is a big business risk!
Vendor risk. Vendor related decisions or actions that impact your farm’s stability. For example, you cannot get the chemicals promised, or the elevator goes bankrupt. This also includes having too much concentration of supply sources.
Technology risk. This includes cybersecurity and adequacy. This includes not only robust software protections, but also process protections, such as managing software and log-in access.
When you see this longer list, there’s a lot there! How on earth do you manage all of these? The answer, frankly, is you do the best you can. You won’t be able to reduce them all. My point is: Are you stopping to think about them all and reduce what you can? Once per year, at minimum, sit down with your management team. Ask yourselves for each category:
Do we all agree on the list of relevant risks?
Is anything in our system changing that increases or decreases this risk?
What can we do mitigate it? Should we consider appropriate policy changes? Are we enforcing our current policies?
Do we need to be more proactive about crosstraining successors?
Should we do a cybersecurity audit? Should we stop sharing one login to the bank account?
Do we have the right insurance riders?
Are our tax advisors well-qualified to keep us in compliance?
These aren’t new issues. Make sure you slow down enough to think through each strategically every so often.
Davon Cook is a family business consultant at Pinion. Reach Davon at [email protected]. The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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